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Range Resources Ties Fortunes To Marcellus Shale

Before the Marcellus Shale leaped into prominence as the
largest natural gas play in the U.S., there was the Barnett Shale
in Texas.

Range Resources (
RRC
) has worked both basins. But the Fort Worth, Texas-based firm is
now largely focused on the Marcellus in Pennsylvania, which has
fueled most of its growth.

Range Resources is so sold on the Marcellus that it sold off
all its holdings in the Barnett. The $900 million in proceeds
from that sale two years ago were reinvested into the
Marcellus.

"The Marcellus Shale is now larger than the Barnett and the
largest gas field in the U.S. by far," said Range's CEO Jeff
Ventura. "In fact, you could argue that its reserves' potential
makes it the second largest in the world."

The largest is the South Pars/North Dome field in Iran and
Qatar. As Ventura tells it, Range "discovered" the Marcellus and
"everyone agrees with that."

In looking to find "the next Barnett," Range saw that the
Marcellus Shale had a lot of the same characteristics as the
Barnett.

That was in 2004. Range began drilling in the Pennsylvania
portion of the play soon after, using the then-new hydraulic
fracturing techniques needed to crack the hard shale rock in
order to extract gas. It found great commercial value there.

"Barnett is a good play, but the quality of the rock and the
economics don't really compete with the Marcellus," Ventura
said.

He says wells in its southwest Pennsylvania sweet spot produce
three times as much as its wells had in the best spots in the
Barnett.

Other firms followed Range into the Marcellus in what
eventually became a virtual stampede. They includeChesapeake
Energy (
CHK
),Cabot Oil & Gas (
COG
),EQT Corp. (
EQT
) andChevron (
CVX
), among others.

"Chevron has good (acreage), but I would argue that ours is
better," Ventura said. "They're in the dry (gas) area of
southwest Pennsylvania. We have the advantage of having more wet
gas, plus we have more net acreage than Chevron, which gives us
greater leverage for future growth."

Though Range still has some oil operations in Oklahoma and
Texas, most of its production comes from the Marcellus.

Range is currently one of the largest producers in the
Marcellus, accounting for 10% of the basin's total
production.

100% Positions

While its 1 million net acres may be topped by a couple of
other players, Ventura says Range stands out for holding 100%
positions in its acreage, unlike others that often form joint
ventures and other deals with third parties.

Moreover, most of Range's holdings are in the core region of
the play, especially the more lucrative liquids-rich southwest
part of Pennsylvania. Liquids-rich gas fetches higher prices than
dry gas.

"The best wet gas is in the southwest corner and the heart of
it is in our big position in Washington County, the bull's eye of
the highest quality rock with the wet gas in it," Ventura
said.

Analyst Leo Mariani of RBC Capital Markets says Range has "the
largest net acreage position in the wet gas window," which makes
it stand out from other operators. He says it's also a low-cost
producer with "extremely substantial inventory to drill."

Range operates 500 wells and counting in the Marcellus.

Range expects to grow production 20% to 25% annually for the
foreseeable future. At that pace, Ventura says, its output will
double about every three years.

At the end of 2012, Range was producing nearly 800,000 million
cubic feet equivalent per day. He thinks the firm can get to 1.6
billion cubic feet in roughly three years. And in six years, it
would be about 3 billion.

That latter number is significant. It would mean Range would
surpass the previous U.S. record set by a single company in a
single play, the 2.6 billion cubic feet per day by ARCO in
Alaska's Prudhoe Bay oilfield in the late 1970s.

"The largest producing oilfield in the U.S. still is in
Prudhoe, though the Bakken may surpass it," Ventura said.

"My expectation is that (Range) will do better than that 20%
to 25% (growth)," said Mariani. "Production in the play has grown
like a weed for the last several years."

While second-quarter financial results won't be released until
Wednesday, Range reported that production volume in the quarter
reached a record high of 910 million cubic feet of natural gas
equivalent per day. That's a 27% gain over the prior year's same
quarter.

Natural gas prices have risen from ultralows last year of
around $2. Earnings fell 17% last year to 92 cents a share due
largely to ultra-low gas prices.

Earnings Surge

Analysts expect second-quarter earnings to rise 190% over last
year to 32 cents a share and end the year 60% higher than in
2012, to $1.47, according to a Thomson Reuters poll. Revenue is
seen growing 19% to $1.7 billion.

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